Retirement Sinkholes

Robert Laura
, ContributorOpinions expressed by Forbes Contributors are their own.

Recently a massive sink hole swallowed up nine classic Corvette automobiles at an estimated loss of $3,000,000.There’s actually a video of this hole gobbling up these iconic and very valuable Vettes, which serves as a reminder of what can happen to new and future retirees’ life savings if they don’t avoid their own retirement sinkholes.

Physical Well-Being

Most retirees are aware of the threat that medical expenses can have on their retirement funds. Fidelity estimates that a 65 year-old couple retiring in 2013 may need up to $220,000 to cover medical expenses throughout retirement.That’s a hefty price tag that is best offset by maintaining a healthy and active lifestyle.Yet, for many baby boomers, health and wellness have been put on the back burner as they focus their time and energy on maintaining their careers, aging parents, and adult children.

What’s at risk is their ability to achieve the retirement they desire.One survey found that about 40% of baby boomers respondents said it was difficult for them to kneel or stoop, stand for two hours, walk one-quarter mile, climb 10 steps without resting, sit for two hours, lift and carry 10 pounds, reach over their heads, push or pull a large object, or grasp small objects.The way I translate that is 40% of retirees are going to struggle on a vacation that requires some walking, standing or holding onto a rail. It means spending time on the floor or in the yard with grandchildren is going to be painful and limited, instead of fun and engaging.Pastimes like gardening, biking, or watching a movie may also be less enjoyable than before.

The evidence is clear, allowing your body and physical health to slip into a retirement sinkhole carries consequences well beyond the financial impact.Therefore, boomers need to realize that having a functional body in retirement is of equal, if not more, value than having the proper savings and asset allocation.

Financial Assistance

Six out of 10 Americans over the age of 50 provide financial support to adult family members, which can range in cost from $14,000 all the way up to $34,000 per year.Most commonly, the funds go out to support adult children (68%), then grandchildren (26%), parents (16%), siblings (13%), and other relatives (14%). (Source Merril Lynch & Age Wave)

Providing financial support to family members is a slippery slope.No one wants to see a family member suffer or go without, but not everyone sees financial help in the same light.During my time as a trust officer, I saw money fracture the relationship between spouses, siblings, adult children and even cousins.The problem often stems from unstructured, ongoing, and poorly communicated giving.Retirees who want to avoid this sinkhole can do so by taking the time and energy to establish and communicate parameters to those in need, as well as to those who may be affected (or who potentially may feel slighted). By doing so, issues and concerns can be reduced and the money given becomes a helpful tool instead of a crutch or destructive family force.

It’s not uncommon for a client to call and request funds for a home improvement project.They usually start with a modest $10,000 to $15,000 distribution, but those expenses can quickly climb out of control and truly impact the length of time that their retirement savings may last.

The crater often starts opening with the purpose for the project. Oftentimes, single or widowed women, who are depressed or lonely, look at new counter tops, faucets, and stainless steel appliances as the answer to their woes.But stuff hardly ever lifts their spirits permanently, and real life home renovations are never the same as they see on TV.Major projects can take months to complete and could end up requiring a retiree to hire someone to fix the original contractors work if it isn’t done right. Unfortunately, it’s not just women or the elderly who are susceptible. I know of a trained police interrogator who lost thousands of dollars on a home remodeling project.

The fact is, one home remodeling project often begets another.A simple flooring change can escalate to a full blown kitchen or bathroom remodel, followed by a new deck, driveway, or HVAC system that’s just too good of a deal to pass up. Suddenly, account withdrawal rates climbed beyond 10% instead of the more acceptable 3 or 4%.The sinkhole widens when using savings alone instead of sacrificing, or finding savings in their everyday expenditures.In turn, the promise of increased home value, comfort, and style can lead to more stress than the expected financial trade-off.

Divorce

Typically, couples plan to live on some amount between 70% and 80% of their pre-retirement income.However, if you get divorced, you’ll be faced with the prospect of living on more like 35%-40% of your previous income.Put into financial terms, if your combined pre-retirement income is $150,000, you can expect to live together on $105,000 to $120,000.Separate and, after attorney fees, you’re looking at something more like $50,000 to $60,000.That’s not just a major difference, it’s a polite way of saying your retirement dreams will shrink by at least half.

Therefore, instead of sacrificing what you’ve worked so hard together for, don’t let your relationship deteriorate to the point of splitting up.Stop putting your marriage on the back burner and start investing in it.Set up a date fund, just like you would a mutual fund, and be willing to commit the time, energy and money to living happily ever after, not unhappily on less than half of what you’ve saved.

Whether it’s divorce, home improvement, financial assistance, or physical well-being, there are a number of retirement sink holes waiting to swallow up a retirees time and resources.By simply being proactive and aware of the traps lurking about, they can avoid losing valuable assets.

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